I have made it known to my family and many friends that I aim to create a minimum of $50k in annual passive income from investments in the stock market alone. Recently, while chatting in the cbox at Bully the Bear, I mentioned this and at least one person was incredulous. How to achieve this?

Well, to me, it's quite simple, if I invest $500k in a basket of stocks that yields 10% per annum, I would have that $50k passive income. Then, I gave it some thought later on and decided that perhaps I should share more in detail how this could be achieved.

Taking a leaf from successful authors using the number "seven", this is AK71's "Seven steps to creating passive income from the stock market":

1. Get full time employment - Sounds dreadfully straightforward, doesn't it? Well, sometimes we need to point out the obvious. We cannot grow money in pots of soil or fabricate it at home; well, not legally anyway. Get a well paying job that pays you as much as you are worth (or more than you are worth if you are lucky enough). Don't shortchange yourself.

2. Be frugal - Again, this sounds straightforward enough but it is something that many people find hard to do. Instant gratification is so common in our modern world, isn't it? I want something and I want it NOW! It is quite well known that George Soros takes the subway to work and that the founder of IKEA is still driving the same Volvo he bought more than 20 years ago! I blogged about this recently. Money management: Needs and wants.

3. Save as much as you can. OK, I'm cheating here. This is really a combination of points 1 and 2. Make as much as you can in your full time job and spend as little as you can. The difference: savings. This is your initial capital to realise your dream of passive income from the stock market. Also, remember, money in your CPF-OA is savings and a percentage could be used to invest in the stock market too. Start a SRS account and use the money to invest in the stock market at the right time.Things Singaporean: SRS, CPF-OA and CPF-SA.

5. Technical Analysis (TA): go learn TA if you have not done so already. If FA tells you a company has a fair value of $1 and the price is now 80c, is this good enough to buy? Well, if the company's share price is going through a downtrend, no. Cheap might get cheaper. That's what TA can do for you: it shows you the trend, resistance and support levels. FA cannot do that. Market sentiments do not care two hoots what is the fundamental value of a company and you will do well to remember this.Thoughts on methodology.

7. Reap the rewards of your investments and collect the dividends. Yes, finally, we get to the fun part! You can decide if you want to use the dividends to reward yourself or if you want to add to your pool of savings to be re-invested. Of course, if you want to achieve a higher passive income within a shorter period of time, re-investing is the answer. Just employ FA and TA again to do this.

In the meantime, if you did not get retrenched (knock on wood), ensuring that you continue to save as much of your earnings as you can from your full time job will continue to grow your pool of savings even as dividends received from your investments pour in. Year after year, your annual income increases through greater contributions from the passive income received through your well thought out investments (everything else being equal). Sounds really good, doesn't it?

Before long, you would have a significant stream of passive income supplementing your earned income from employment. After some time, your passive income might equal your earned income and that's when you work because you want to and not because you have to. Now, if this does not convince you, I don't know what will.

It is definitely possible to create a significant passive income stream from investing in the stock market. Like so many things in life, there is just no short cut though. So, if this is your dream just like it is mine, get cracking. Good luck. Yes, you will need some of this too.

Finally, remember, if you find some good companies out there which the analysts haven't discovered yet, come back here and share with us. This is most important.Stock market analysts.

P.S. For the sake of brevity, "companies" in this post refer to REITs and business trusts as well since these are primarily dividend instruments and must be considered in our quest for passive income from the stock market.

48
comments:

RL
said...

Tks for the constant good posts. I quite like your strategy so have been following.

You mentioned about putting $500k in stocks. I am wondering, if I really have $500k cash at hand, would I take a major part to pay for the downpayment of property, or should I be putting them in stocks? What do you think?

Thank you for the compliments and I am glad you like my little big ideas. ;)

If you have $500k in hand, should you take a big part of it to pay for the downpayment of a private property or put all of it in high yielding stocks? I like this question.

You might have read my posts titled "Grow your wealth and beat inflation" and "Real estate as a hedge against inflation". In these posts, I spoke about how real estate should play a part in our overall strategy, if possible.

As with stocks, it is important to time your property purchases correctly. More so because the quantum in property purchases is a lot bigger and you would probably be taking a loan for a large portion of the property's value. So, any mistake would be magnified.

Furthermore, unless we are multi-millionaires, one mistake in a property purchase might be financially crippling as we might not have the resources to ride out any rough patches.

With property, people say it is location, location and location. This is largely true. If you time your purchase correctly, you will have a winner.

Timing? It is not magic. Consider purchasing properties when showflats are more or less deserted (ie when people are too afraid to buy). Find a property you like, keep visiting the showflat and keep talking to the agents. Prices might go lower. When you see the crowds returning, that would be a great time to buy. Things are turning up but won't turn up overnight. So, you would have a window of, say, two weeks to act.

If you think this is a good idea, share with your friends. Everyone should be responsible for their own financial security and if my ideas help in any way, I'm happy.

I'm working towards this goal as well. Right now, with the little capital that I have (Bought an apartment, and spending money on my wedding), I'm very focused on point one; full time employment income.

I plan my career. I make sure I pick up valuable skillsets in my line of work; skillsets that are transferable. I managed to rotate around and am now working in my third team in a short span of 2 years with my current employer. This makes me more valuable within the firm. It has also upped my market value in the industry.

My career is now my priority. Not investing.I think most people get the concept wrong. They dread going to work, they want to get rich quick. They want to make a fortune from the stock market or flip properties like roti prata. The don't aim to climb the corporate ladder. I can safely say that this concept is wrong.

I enjoy going to work. I love challenges. I don't mind the long hours. I don't mind the stress. I manage the politics. I think we should work hard and not keep thinking of ways to stop working.

Hello! it's the first time that i'm reading your blog =) I too feel that your blog entries are much clearer and easier for beginner investors to follow as compared to other financial investment blogs. I am currently still waiting for LMIR to fall... *cross my fingers*

Without capital, there is no need to talk about investments in any form. Accumulation of capital requires something predictable. For most people, that predictability comes from having a full time job.

So, you have your priorities in the right order. Everyone should start from point number one unless they are born with a silver spoon in their mouth.

You sound like a very driven person and your company seems to be treating you well. You have point number 1 covered. :)

As for your last paragaph, my take is that we should work hard but we should also work hard planning for the days when we would, should or could stop working. We need to have knowledge of the ways that would help us achieve that. That's what my blog is about. ;)

I always enjoy our chats in LP's cbox. Very happy to see a comment from you here. I look forward to hearing from you again. :)

Waiting for the price of LMIR to fall before accumulating is a good idea. I am waiting for it to correct to 46c before buying more. However, that is just TA showing us where is the next support. It might or might not happen although in the current environment, it seems probable. Anyway, I always hedge.

As for FSL, I have some units of this bought at prices I would rather forget. One of my mistakes in the past. Shipping is a tough business but I won't go into details here. I dislike the idea that their assets are depreciating in value and this is independent of global economic performance. Having said this, I believe that the outlook for FSL has stabilised for now and the probability of nasty surprises in the near future is low.

Thank you for your informative blog posts! I came across your blog while searching for news on Saizen REIT's YK Shintoku loan. I am vested in Saizen REIT 2012 warrant since Sep 09, and I am accumulating even more.

Like you, I am a believer in high-yield stocks and I have the same goal - to gain financial independence through investments in high-yield instruments.

Re your post today, I might just add that there are quite a number of stocks that are have dividend yields comparable or better than the REITS/Business trusts you listed above (Starhub, Innotek and Global Invest being three examples).

At the current prices, could you share with us the yields, the gearing levels and the NAVs of Starhub, Innotek and Global Invest here? These are the criteria I use to pick out good investments in REITs. So, we want to compare using the same financial yardstick.

I'm glad you like my posts and I look forward to hearing from you again. Thank you. :)

I read the report on Innotek by Kevin Scully (NRA) in Next Insight earlier today. I think you might have a winner here. It's definitely a value proposition.

As for Starhub, I have been wary of it despite its high yield because of its nightmarish gearing level. Should an asset light business model have such high gearing? Capitaland is asset light with all their divestments but they don't have massive debts, do they?

Perhaps, I do not understand Starhub's business and I try to make it a point not to invest in businesses I don't understand. If you would like to share more of your insights here, please do. I'm very interested.

Regarding the rude shock you received from going through Global Invest's figures, if you could share it here too, I would be much obliged. After all, we should learn what are the kind of companies to avoid as well.

Just happened to stumble on this blog from finance.sgIt s a very good financial management website. Yeah, i have tried the the seven steps to create a passive income. It works, at least in the sense that I managed to have a 600K portfolio using the first few steps mentioned. It shows we can be financially independent even when we start out poor.But on another point, to get a 50K annual dividend is very difficult using this portfolio. I dont like REITs; I think they are too cash hungry. Too much debt and too ready to raise funds from shareholders. Any inability to refinance debts is a huge threat.I like Venture Corp, SPH, M1 for their dividends. I keep them (or used to keep them) in my portfolio, but the yield is around 7 percent. And these are just part of the portfolio. There are many stocks such as Citigroup that dont give out dividends and this brings down the overall portfolio yield lower. That is why I think, in order to get 50K dividend on a yearly basis, I wlll need a million bucks.Just my thots.

With regards to REITs, it is probably right to say they have been tarred with the same brush, very much like S-chips. We hear how people no longer trust S-chips as well.

There might be some good members in the group which might unjustly suffer the same negative discrimination through no fault of their own. It becomes too easy to stereotype.

That is why I have crystallised a set of guidelines which, if followed closely, should find us strong, dependable REITS to generate high yields, contributing to our passive income stream.

Ultimately, it depends on one's comfort level with different strategies available. If you no longer feel comfortable with REITs, it is probably best to leave them out of your portfolio. Peace of mind is priceless. :-)

I do not know why "First REIT" came into my head. I should have said "Sabana REIT". My apologies.

I have blogged extensively about Sabana REIT as well. Use the search function at the top of my blog or go to the box on the right sidebar that says "Investing in REITs and Business Trusts". Happy reading. :)

I am a big fan of your blog since stumbling upon it a few months ago. Sorry for not leaving a comment earlier.I had moderate positions in AIMSAMREIT and Sabana REIT but however made mistakes by investing in two REITS too early. Mainly Suntec @ $1.27 and CapitalCommercial @ $1.26. What is your advise with regards to this two REITS!

What is good and what is cheap? You have to decide on the valuations yourself, of course.

Is a $1 stock cheaper than a $10 stock? Is a counter with a 10% distribution yield better than a counter with a 4% dividend yield?

Finally, yes, the 7 steps I have outlined in this blog post are simple enough for anyone to follow, even full time students. Step 1 will have to be amended, of course. Part time employment? Why not? ;)

Thank you for sharing your knowledge and showing us that it is possible to earn sufficient passive income to live on when we retire.

I'll like to know your recommendation for FA and TA book/s. Also, is there any seminar or classes that you highly recommend? I've been researching on a basic class where I can learn the "rules of the game". Wish the universities would conduct such classes.

I am self taught. So, I cannot recommend any courses, having shunned them and saved thousands of dollars in the process. ;)

If you are just starting out on TA, the DUMMIES series is actually quite good. There is a general one on Technical Analysis and one on Candlesticks Charting. Then, if you were to move on, there is a book by Michael Kahn called "Technical Analysis Plain and Simple".

For FA, I like "Warren Buffet and the Interpretation of Financial Statements". Really easy to digest.

You might want to try ordering the books from BetterWorldBooks. They ship free worldwide. Here is the link to my blog post on them:

now you can reserve a book and request them to transfer to the Library that you choose and reserve for you, if the book is available for collection, they will inform you. Very convenient, with $1 plus cost only.

Hi AKJust stumbled to your blog from some other SG investments blogs and I'm glad I did.

1. When and How do you take the decision to divest ? Majority of your investments are for passive income, divestment means that you might be getting the same stock at a higher price later even though there could be a stock market dip.

2. Upon divestment, would you reinvest immediately ? Else that means losing the passive income too.

3. Do you do analysis such as finding intrinsic value of a company using discounted cash flow etc ? Some value investing courses out there advocates such analysis, the course fees are not cheap for just couple of days.

Thanks for the great post. Start learning stock investing merely 3 months ago and still too much to learn.

As a newbie, always having difficulty finding the "right" time to buy. What should be the "strategy" then? Take Super Group for example, the price appreciate quite a fair bit from $2+ to $4+ now. Should wait for the "correction" or buy now and average down? The "correction" could be next week, 3 months later, or 2 years late, can't predict Mr. Market mood.

Thanks for sharing ur great thoughts. We are working towards that goal too. Spend less, save more. A lot of times, we just buy things for others to see what we can afford. I'm hoping to retired by 40 and get a lifestyle job. Why are u still working if ur passive income is much more than u make as a salary man? Lost 10k$ previously in the market, just follow blindly. Now I'm more prudent. I like what u share, it really insightful, and easy to digest (I'm very thick when it comes to working my brain) . Very nice blog.

Sounds like you have not been slacking at all. For sure, being financially prudent is one of the first steps towards financial freedom. It should be one of the simpler steps to take but for many, it is still quite a challenge. So, gambatte! :)

Once we have our desired level of passive income, we can choose to work because we want to and not because we have.

However, I have blogged or commented before that it is not quite so easy as we will discover later on.

There will be reasons why we might not want to quit right away especially if we have built good and strong relationships at work over many years. For a while, I was also worried if my passive income would be sufficient to take care of my parents and possibly my sister and niece as well (and I decided that it wouldn't be enough). I think a lot. Some say I think too much.

I am glad that you enjoy my blog and if you have found it helpful in the slightest bit, that is good enough for me. :)

Thanks for the great article! I just graduated and started to invest in REITs.

Though my REITs prices are dropping, I still hope that they will be able to bring me passive income. It is quite a scary experience because I just started doing this and unlike the conventional way where my parents would only encourage me to buy and sell and go.

It is very encouraging to know that you buy and hold REITs and receive passive income!

Wisdom to tap on.

Disclaimer

The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.